Much has been made in recent years about the blockchain's outsized contribution to climate change. However, most of that criticism has been leveled against networks that use the proof of work consensus mechanism. With more and more networks opting for the proof of stake mechanism instead, it is quite possible that blockchain activity will have a reduced impact on the environment going forward. In this article, we will explain the difference between the proof of work and proof of stake consensus mechanisms and analyze whether the proof of stake carbon footprint is substantially smaller than that of the proof of work mechanism.
What is a consensus mechanism?
Traditional databases are maintained and controlled by a central administrator. The central administrator can be a business, government, non-profit organization, or any other type of organization or individual. In order for the database to function properly, the central administrator must update the database with new information and make sure that the database is always accurate. For example, the central administrator is responsible for verifying transactions and recording them within the database.
Public blockchains are different than traditional databases in that there is no central administrator. Instead, blockchains rely on a decentralized network of thousands of users to maintain and update the database (often referred to as a ledger). “In such a dynamically changing status of the blockchain, these publicly shared ledgers need an efficient, fair, real-time, functional, reliable, and secure mechanism to ensure that all the transactions occurring on the network are genuine, and all participants agree on a consensus on the status of the ledger.” As such, “a consensus mechanism is the standardized way of how the blockchain’s nodes – the computers that run the blockchain and keep the records of all transactions – reliably reach this agreement.”
The two most popular types of consensus mechanism are proof of work and proof of stake. Let’s take a closer look at both.
What is the proof of work consensus mechanism?
Proof of work is a consensus mechanism used to validate transactions on the blockchain. The proof of work mechanism relies on the contribution of individuals and businesses called crypto miners. Miners are people or businesses that use their computers to validate transactions on the blockchain by adding blocks of data one at a time. Because miners perform work that contributes to the functionality of the blockchain as a whole, they are rewarded for their efforts with payment, generally in the form of native cryptocurrency.
Miners validate transactions by competing with one another to solve a complex algorithmic problem first. In most instances, the computational problem involves guessing a password chosen at random by an algorithm. When a miner’s computer guesses the correct password, a block is added to the blockchain, the transaction is validated, and the winning miner collects a reward of native coin.
What is the proof of stake consensus mechanism?
The Proof of Stake consensus mechanism has emerged recently as a more secure and environmentally-friendly alternative to the proof of work validation mechanism described above. The proof of stake mechanism operates differently than the proof of work mechanism because it uses an algorithm to select a single “validator” to verify transactions.
Proof of Stake validators must offer up collateral in a process called “staking” to help ensure that they validate transactions quickly and accurately. If the validator verifies the transaction correctly, a block is added to the blockchain, the transaction is validated, and the validator is rewarded with a native coin payment in addition to the return of their collateral. If, however, the validator does not quickly and accurately validate the transaction, they forfeit the collateral. The potential for loss of collateral is motivating because a significant amount of crypto is at stake. “In Ethereum’s case, you need to stake 32 ETH tokens to get started as a validator.” Recently, each Etherium token has been worth about $1,200 USD.
How much energy is required for proof of work networks to operate?
As discussed above, proof of work relies on the contribution of miners to validate transactions. A particular transaction is validated when a miner uses computer power to solve a complex algorithmic problem. However, the proof of work system is set up as a competition between miners. Only the first miner to solve the computational puzzle is rewarded with native coin. In order to compete, miners use high-powered computers that require significant energy to function properly.
The increased popularity of cryptocurrency in recent years has brought many new investors and miners to the market. While the heightened interest is good for the crypto market as a whole, it has created an upward spiral of energy consumption for proof of work systems. In order to cash in on this new market opportunity, miners have set up large-scale crypto mining facilities that run hundreds of computers twenty-four hours a day. And, “to prevent too many new tokens from flooding the market, the [algorithmic] puzzle solving gets harder over time — requiring more energy.” The rapidly increasing energy consumption has led many observers to question whether the proof of work mechanism is environmentally sustainable.
In the early years, when the crypto market was small, the proof of work mechanism did not have a significant impact on the environment. However, as the crypto market has grown, climate concerns have also intensified. But how energy-inefficient is the proof of work mechanism, and how large is its carbon footprint? As it turns out, that is a difficult question to answer. The first challenge is that many networks use the proof of work mechanism. It is difficult to get reliable data from every proof of work network, so the best estimates of climate impact have focused on Bitcoin, the largest cryptocurrency currently employing a proof of work mechanism. The second challenge has to do with the location of crypto mining facilities and the type of energy used to run their operations. Some crypto mining facilities use sustainable energy to power their computers. For example, several crypto mining facilities run primarily off of hydroelectric power. Most crypto mining facilities, however, are powered by traditional energy sources that use fossil fuels. As a result, the best information about the environmental impact of the proof of work mechanism has focused on Bitcoin mining facilities that rely on fossil fuels to power their equipment.
According to recent studies, Bitcoin mining produces about 62 metric tons of carbon dioxide emissions each year. In addition, it consumes about 112 terawatt hours of electricity and creates about 39 kilotons of electric waste annually. Admittedly, these numbers are a bit difficult to comprehend. With a few comparisons for context, however, it becomes clear that the proof of work mechanism is shockingly bad for the environment. For example, the carbon footprint of one Bitcoin transaction is often compared to driving a gas-powered sedan for over 500 miles. Every Bitcoin transaction has the same carbon footprint as 1.4 million Visa transactions.
“According to the Bitcoin Energy Consumption Index estimates, a single Bitcoin transaction consumes the same amount of energy as an average US household for 57.25 days…” In fact, the total annual energy consumption of Bitcoin mining is greater than all of the energy used in some countries. Bitcoin mining consumes more energy on an annual basis than the country of Kazakhstan and slightly less than the Netherlands.
The carbon footprint of the proof of work mechanism has become so large that many lawmakers are contemplating intervention. In fact, “state legislators in New York, which became a hub for crypto mining after China cracked down on it in 2021, passed a moratorium this year on cryptocurrency mining operations that use proof of work.”
How much energy is required for proof of stake networks to operate?
As outlined earlier, the proof of stake mechanism operates differently than the proof of work mechanism. Importantly, the proof of stake method rewards validators based on the amount of coin they can put up as collateral rather than the amount of computing power they devote to crypto mining. While this change may seem trivial at first glance, it has a profound effect on the power consumption of blockchain activities.
Because significant computer power is not required for the proof of stake mechanism to function properly, a greater number of transactions can be validated while also using less power as compared to the proof of work mechanism. In fact, proof of stake transactions can be validated using computers with as little as 8 GB of RAM. This results in a drastic reduction in energy consumption per transaction. We can see the difference in per-transaction efficiency by comparing the Bitcoin network, which relies on the proof of work mechanism, to Tezos and Ethereum, which now use the proof of stake mechanism. “The Bitcoin network can only conduct roughly five transactions per second, for an energy cost per transaction of 830kWh. Ethereum can conduct around 15 transactions per second, for an energy cost per transaction of 50kWh. Tezos can conduct about 52 transactions per second for an energy cost per transaction of 30mWh. The difference between Bitcoin and Tezos here is a factor of 25 million; the difference between Ethereum and Tezos is a factor of 1.5 million.”
Total carbon footprint and energy consumption numbers for the proof of stake mechanism are difficult to estimate. However, the Crypto Carbon Rating Institute (CCRI) has provided some of the most reliable statistics to date by analyzing individual proof of stake networks.
For example, the CCRI estimates “yearly electricity consumption of the Proof of Stake networks from 70 MWh for Polkadot to 1,967 MWh for Solana. This results in carbon footprints between 33 and 934 tonnes of CO2e annually, respectively.” Collectively, these two networks consume a similar amount of energy as 200 US households and produce similar levels of carbon as 153 intercontinental flights. The energy consumption and carbon footprint of these two proof of stake networks are very low, considering the number of transactions that are being validated. In fact, CCRI estimates that the carbon emissions of the companies behind these networks are higher than the carbon emissions of the networks themselves.
Proof of work vs proof of stake carbon footprint comparison
The Ethereum network is a terrific test case when comparing the carbon footprint of proof of work and proof of stake mechanisms. As some of you may know, Ethereum recently transitioned from using the proof of work mechanism to using the proof of stake mechanism. Ethereum’s “merge” was carried out in order to address the environmental concerns associated with the proof of work mechanism. As a result, Ethereum is quite interested in studying the environmental impact of switching from proof of work to proof of stake. Initial results indicate that the impact has been profound. Recent testing indicates that the “successful transition to proof of stake is expected to slash Ethereum’s energy use by at least 99 percent. The Ethereum Foundation put the number at roughly 99.95 percent.”
The numbers are equally striking when comparing the energy consumption of just about any proof of stake network to a proof of work network like Bitcoin. According to CCRI, “in comparison to the decentralized cryptocurrency Bitcoin, PoS (proof of stake) networks consume less than 0.001% of the Bitcoin network.” The positive environmental impact of proof of stake networks relative to proof of work networks is nothing short of revolutionary.
Carbon Footprint (Annual): 62.51 Mt CO2
Electrical Consumption (Annual): 112.06 TWh
Carbon Footprint (Annual): 0.01 Mt CO2
Electrical Consumption (Annual): 0.01 TWh
Proof of stake accounting with Bitwave
Proof of stake networks have proven that they are better for the environment than the proof of work alternatives. It stands to reason that proof of stake networks will become the norm in the years ahead. Luckily, Bitwave has everything you need for proof of stake accounting and taxes regardless of whether your company collects staking rewards or manages a crypto exchange. Contact us or explore our resources to learn more about how Bitwave can get your business organized and ready for the crypto market of the future.